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Opportunities in SA’s retirement dilemma

06 October 2021 Gareth Stokes

The Covid-19 pandemic gave many South Africans a taste of the challenges they face when their monthly income takes an unexpected hit. As such, the crisis offers an opportunity for financial advisers to reach out to their clients and have that ‘heart to heart’ retirement planning chat. The need to improve retirement savings outcomes was a central theme during the launch of the fourth edition of the 10X Investments’ Retirement Reality Report (RRR). The latest report is based on the 2021 Brand Atlas Survey, which tracks the lifestyles of 15 million economically active South Africans living in households with a monthly income exceeding R8000.

The unemployment hurdle

Chris Eddy, Head of Investments at 10X, introduced the 2021 RRR with a stark warning. He said that  many South Africans will revisit the pandemic income shock when they reach retirement, unless they take radical steps to reverse the negative trends highlighted in the report. Before discussing consumers’ attitudes and behaviours, Eddy painted a bleak picture of the prevailing retirement funding landscape. “Retirement savings are typically generated by saving a portion of your income when you are employed; unfortunately, South Africa has one of the highest unemployment rates in the world, with 43% of those aged 25-34 and 64% of the youth unemployed,” he said. The 2021 RRR mainly focuses on the shrinking sub-set of the population that is gainfully employed. 

Unemployment has obvious impacts on the ‘saving for retirement’ part of the journey; but it could also prove an obstacle to those who plan to supplement their income post-retirement. “Those who are fortunate enough to be employed could have very little chance of working past their retirement age, due to the growing number of job seekers,” opined Eddy. This emerging reality should serve as a wakeup call for thousands of savers who are thinking about holding on to their job, or finding new employment after their intended retirement date. Of greater concern though, is that 50% of survey respondents said they do not have a retirement savings plan in place. This is a sad indictment on many stakeholders in the domestic economy, not least the formal employment sector. 

Pleading the fifth on retirement savings

“This number swells from 50% to 71% of people either having no savings plan in place, or only a vague idea of their plan,” said Eddy. When asked why they had no savings plan in place, 64% of respondents went with: “I cannot afford to save, I have nothing left over at the end of the month”. How should the financial advice community respond to this statement? After all, they cannot give advice if the potential client has nothing to invest in financial product… But what if we flip this scenario on its head. There are so many advice practices claiming that leads are increasingly scarce, yet seven in 10 households are screaming for assistance in setting up the most basic financial plan. The advice practice that figures out how to offset the upfront investment in client education and relationship building against future earnings is going to make an absolute mint! 

At the other end of the scale, 29% of those who had plans in place felt good or pretty good about their retirement plans. “If you do have a plan, and you are engaged with it, you can proactively assess where you are in your savings journey and determine what you need to do to provide sufficient savings for yourself in retirement,” said Eddy. “If you are not engaged at all, it is a ticking time bomb”. The lack of basic financial education is evident in many of the 2021 RRR results, with many saying that retirement saving was “not a priority” at this stage of their lives. Eddy saw this as a positive: “If shows that people are more engaged with the problem, even if they are not able to do anything about it right now”. But from an outcomes perspective, simply engaging with the problem will not yield the desired result. 

The 12x capital multiplier

There are far too many consumers who stick with the retirement fantasy that they will make up for lost time later in life, with a worrying 48% of people surveyed saying they could save for retirement in less than 30 years. “The difference between saving for retirement over 40 years versus 30 years is that in the former scenario you can expect to have a retirement income that is 83% higher than the latter,” said Eddy. Another chilling fact is that those who withdraw funds at age 25 are forgoing as much as 12 times the withdrawn amount upon retirement. So, delaying the retirement savings journey by 10 years, or making early withdrawals, can have a huge impact on your eventual retirement outcomes. 

Perceptions about retirement age vary widely between younger and older survey respondents. The 2021 RRR shows that 35% of respondents under 35 believe that retiring before the age of 60 is achievable. In contrast, amongst those 50 years and older, 71% reckon that their retirement reality will see them working to beyond the age of 65. “We are seeing a big disconnect between young savers’ expectations versus the reality that most South Africans are finding themselves in when they near retirement age,” said Eddy. 

It is also increasingly clear that the mere act of having a retirement plan will not guarantee a sustainable retirement. Of the cohort who had a retirement savings plan in place, only 7% were confident that they would not need additional income to maintain their living standards in retirement. Remember, this is 7% of around 50% of survey participants! And it emerged that 79% of consumers with “some sort of saving plan” were worried that they would not have enough to live on after retiring, up from 75% in 2020. The 2021 RRR survey confirms that people are less certain that they will have enough money to retire on when, across all income brackets. 

Quick fixes to the savings dilemma

What are the solutions? There are two quick fixes… The first, would be to introduce compulsory saving; but not necessarily through a government-sponsored plan. And the second, would be to introduce compulsory preservation with partial access, as recently proposed by National Treasury. “Compulsory savings offered through an employer scheme is also key to addressing the retirement savings crisis in South Africa,” said Eddy, adding that there was a real need for education and member engagement in that space. Ongoing communication between fund, employer and fund members is seen as crucial for members to be kept informed of their progress. 

“Since 2018, we have seen a steady deterioration of financial preparedness for retirement among South Africans,” concluded Eddy. “And the pandemic has magnified the acute financial distress of many households, making it harder to save for retirement”. The only positive comes from the shock value in the 2020 experience… It is hoped that the hardship of making do with less income during pandemic will raise awareness among households of the risk in not making adequate retirement provisions. 

Writer’s thoughts:
It will take huge effort from both government and the private sector to steer South Africa Inc on a course to reduce unemployment. Until we create more formal sector job opportunities it is difficult to see how any stakeholder can effect meaningful improvements to retirement funding outcomes. Could the financial advice community step in to offer basic financial education and / or financial advice without requiring immediate compensation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]




Added by Cynical Simon, 06 Oct 2021
I am convinced that the bottom fell out of the traditional concept of retirement. It appears to me that retirement per se is an outdated concept.
The new normal is a working life without retirement.
I do not know what the solution is but am afraid that "more of the same" along "the same old tracks" will inevitably lead to the same bleak outcome as the present failure..
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